Standard & Poor's Ratings Services said it lowered its rating on Hillview, Ky.'s general obligation debt five notches to B-minus from BB-plus and placed the rating on CreditWatch with negative implications.
"The downgrade and CreditWatch placement follow the city's move to file for Chapter 9 bankruptcy on Aug. 20, 2015," said Standard & Poor's credit analyst Scott Nees.
Hillview's Chapter 9 filing stems from mounting costs related to an adverse legal judgment against the city regarding a land sale to Truck America Training.
In 2012, a Bullitt County Circuit Court jury sided with Truck America and assessed damages against the city of $11.4 million plus interest, a decision affirmed by the Kentucky Court of Appeals in March 2014.
The city subsequently filed a motion for discretionary appeal with the state supreme court. The court elected not to hear the case in March 2015, leaving the city with no further legal recourse and precipitating the Chapter 9 filing.
The original $11.4 million settlement had been accruing interest at a 12% annual rate, and the amount the city owes has risen to approximately $15 million. Carrying charges on Hillview's outstanding GO debt total 6% of the city's annual budget of approximately $2.6 million.
"The CreditWatch with negative implications reflects our view of the situation as Hillview waits for the bankruptcy court to either approve or deny the bankruptcy petition," said Nees.
If it approves the petition, the agency will lower the rating as it would likely increase the probability of default. If the court does not approve the petition, the agency will review the city's options for the liability and take rating action as needed.
While Hillview's financial and economic position remain largely the same as in the last review in February 2015, given the changes that have transpired with the bankruptcy filing, the agency considersthe city's access to the capital markets weaker, bringing its liquidity score down to weak from adequate.
